Government Policy

With income tax returns completed and filed (hopefully on time), the next big tax payment many people across the country will make will be property taxes. According to the findings of a new residential property tax study from the Tax Policy Center, in 60% of U.S. counties the reported property tax burdens average between $500 and $1,500 a year. But that might only cover a month’s worth of taxes on a home in the most highly taxed counties.

Average Residential Property Taxes by County (source: CNN)

Some of the highest average property tax burdens can be found in the New York. Westchester County, N.Y. ($9,647 a year) and Nassau County, N.Y., ($9,080) (both New York City suburbs) had the highest average residential property tax burdens. Many other counties in New York also have high property taxes, a result of duplicative local government units (one county alone had 941 separate governments, including towns and villages as well as police, fire, and school districts) and an education funding system that relies predominantly on property taxes.

On the other end of the spectrum, 24 counties nationwide had annual property taxes below Continue Reading

Applications for U.S. home loans plunged last week as mortgage rates matched their high of the year, according to the Mortgage Bankers Association (MBA). Refinancing activity has also fallen to its lowest level in over four years. The MBA seasonally adjusted index of mortgage application activity (which includes both purchases and refinances) fell 13.5 percent last week, the worst performance for the index since 2008.

As a result, many banks are cutting their mortgage divisions and closing units that had been created to service customers during the recent refinancing boom. JPMorgan laid off more than 2,000 employees in early August, about half of them in its originations division. Bank of America, Wells Fargo, and Citigroup have also made major staff cuts in their mortgage lines of business in the last quarter.

Wells Fargo, which currently makes about one out of every four home loans in the United States, recently announced layoffs of 1,800 staff, including about 350 Twin Cities-based employees. The company employees about 20,000 in the state of Minnesota, 8,000 of which are in its mortgage operation. Company officials said the recent layoffs would not impact Wells Fargo’s interest in the proposed Ryan Cos. development in Minneapolis’ Downtown East; Wells Fargo has been linked as the potential anchor tenant for the project’s 1.1 million s.f. of office space.

Smart Growth America, a national research and advocacy organization for better development practices, recently released a report recommending a slate of reforms to federal government involvement in the real estate market. Together, the reforms would purportedly save approximately $33 billion while aiming to better align federal programs with policy priorities.

Among the report’s criticisms of current federal programs are that they favor single-family homes over other housing types, penalize individuals who cannot or choose not to buy a home, and that they benefit a relatively small proportion of households. For example, over 75% of mortgage interest tax deduction benefits go to households with incomes of over $100,000/year; arguably, these benefits are not promoting broad homeownership as much as subsidizing more expensive home purchases by higher income buyers.

To address those concerns and others, Smart Growth America (SGA) proposes several policy changes, many aimed at removing subsidies which lack a strong link to housing policy objectives. One such change would be to reduce the mortgage interest deduction value cap from $1 million to $500,000 and to limit the deduction for households earning over $100,000 so as target the benefit to individuals with greater economic need.

Another suggestion is to lower the limit for FHA-insured loans from its current historically high level of $729,000. Congress raised the FHA limit during the recent economic downturn, during which period FHA’s share of insured mortgage originations grew from 5% to 25%. SGA suggests lowering the limit for FHA loans back down to more traditional levels to refocus on the program’s original intent of helping first-time home buyers obtain financing they couldn’t otherwise obtain in the private mortgage market.

One of the report’s most innovative ideas is the establishment of mortgage savings accounts. Americans may already take advantage of tax-free savings accounts for health care and college expenses. Smart Growth America suggests that Congress should authorize a similar option to allow individuals to save for a home purchase. Modeled after an existing program in Montana, it would be limited to first-time home buyers, who would be able to make pretax contributions for up to 10 years; funds put towards the purchase of a home would not be taxed.

Among the report’s other suggested reforms are to eliminate some rate subsidies from the National Flood Insurance Program, increase the Low Income Housing Tax Credit, and to improve the Rehabilitation Tax Credit. The full report can be viewed here.

Steve Katkov, UST Real Estate Professor and business and real estate attorney at Thompson Hall, talks to Fox 9 about renter’s rights in the summer months. Should landlords be required to provide air conditioning to their tenants in the summer similar to the cold weather rule in the winter? Here is what Professor Katkov had to say:

In a decision that many believe will have broad implications for how land-use agencies obtain concessions from landowners who wish to develop their property, the U.S. Supreme Court last month sided with a Central Florida property owner who challenged the terms of a state-issued development permit for wetlands property he owned. The 5-4 decision in Koontz v. St. John’s River Water Management District overturned a Florida Supreme Court decision that found in favor of local regulators and against the landowner.

In this case, Coy Koontz sought to develop a portion of 15 acres of property, which included some wetlands. He proposed to develop 4 acres of the property and offer the remaining 11 acres as a wetlands conservation area. The local Water Management District, however, refused to approve his project unless he made additional concessions. The St. John’s River Water Management District offered Koontz two options: either limit his development to 1 acre and devote the remaining 14 acres to wetlands preservation, or pay for off-site mitigation of 50 acres of wetlands elsewhere in the district. Koontz thought these conditions excessive, so he sued under a state law permitting him to seek damages. The Florida Supreme Court held that Koontz did not have a claim because existing court standards limiting local land use authority did not apply to the denial of permits or to monetary concessions.

Prior to the Koontz case, courts did not give heightened scrutiny to the denial of land use permits or the imposition of monetary concessions on developers by land use authorities. Heightened scrutiny had been limited only to “title exactions,” which are are a requirement that an easement or title to some of the property be dedicated to the public, such as a conservation easement to preserve a wetlands area. In Nollanv. California Coastal Commission, the Court established that title exactions must bear an “essential nexus” to the harm prevented, meaning land use authorities cannot require title exactions which are unrelated to the negative impacts created by a development. In Dolan v. City of Tigard, the Court found that exactions imposed must be “roughly proportional” to the adverse impact of the project on the community. The Koontz decision extends those standards to include not just title exactions, but also permit denials and monetary exactions by land use authorities.

The U.S. residential real estate industry is showing signs of a recovery. Demand for homes is growing stronger, driven by historically low interest rates and government subsidies. Job growth would, of course, accelerate that rebound. However, for a sustained recovery, housing supply must increase with both new construction and regulatory reforms that could bring to market homes that are “under water,” or those whose market prices are lower than their outstanding loans. Those were the main highlights from a panel discussion on real estate industry trends at the Wharton Economic Summit 2013, held in March in New York City.

A crucial element of the legislative reforms is to find ways to shield the federal government from home financing losses, the panelists said. The government ended up becoming the country’s biggest home financier after the 2008 housing collapse, when it bailed out secondary mortgage finance agencies Fannie Mae and Freddie Mac at an estimated taxpayer cost of up to $360 billion. Bipartisan political consensus holds the key to the reforms, panelists stressed.

The panel included Jeff Blau, CEO of Related Companies, a New York City-based real estate development firm; Jonathan D. Gray, global head of real estate at New York City-based financial advisory firm Blackstone; Jim Millstein, chairman and CEO of New York City-based financial advisory firm Millstein & Co.; and Richard A. Smith, chairman, CEO and president of Realogy Holdings Corp., a New Jersey-based real estate franchising and services company. Joseph Gyourko, Wharton professor of real estate, moderated the discussion.

Unexpected Recovery

“The metrics certainly indicate a much stronger interest in residential housing than it seemed in the previous six years,” said Smith. His firm Realogy operates in all 50 U.S. states and 102 countries and has a 26% market share of the U.S. housing market in sales volume. The recovery has gathered pace since the first quarter of 2012 and is “completely unexpected,” he added.

Consequently, home prices have strengthened and the overhang of unsold homes is bottoming out, but something “much more dramatic” is occurring, according to Smith. “We literally have markets where we have no supply, no inventory,” he said, citing New York City as an example of this phenomenon. He saw that across the country — a week’s supply of homes in San Francisco, no inventory to sell in Miami and an outpouring of open houses “in every market” where Realogy operates. “We feel very strongly that this is a strong recovery and it is sustainable.” In Phoenix, home prices are up 25% and they have risen in the “very high double-digit percentages” in Southern California, added Blackstone’s Gray.

Smith said the housing recovery is occurring despite impediments. He cited two issues relating to the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act. One is a decision on what constitutes a “qualified residential mortgage,” or QRM, because that would set the criteria for the down payment for home loans that underwriters require. A related second issue is whether a decision about QRM could encourage developers to resume homebuilding.

Increased housing inventory is critical for a sustained recovery, Smith argued. A resolution to the QRM issue could release some of the 10.8 million homes that are under water, he explained. “If we do not have the increase in inventory, then we will still have a recovery, [but] that will be anemic.”

Since 2009, underwriters have been wary of risk and are lending only to “the highest possible standard” of borrower creditworthiness, Smith noted. He called for a speedy resolution of the matter and hoped the new debt-to-income criteria would be less onerous than people fear they might be. He clarified that he did not expect underwriting standards to become more lax. He only wanted to get back to the “pre-bubble” days, when underwriters required credit scores about 100 basis points lower than current expectations of about 750, he said. (Credit rating agencies award scores from 300 to 850.)

This article came to my attention recently. It was written by Marlys Harris and it appeared on December 18th, 2012 in MINNPOST. I think it is an interesting look at what happened and what might have been.

Herb Tousley

This coverage is made possible by grants from the Central Corridor Funders Collaborative and The McKnight Foundation. By Marlys Harris | 12/18/12

Since I began writing this column last spring, I envisioned two year-end pieces. One would itemize the worst things that planners, bureaucrats, politicians, developers and We the People have done to our Twin Cityscape; the second would list the best. My thought was that both might provide some lessons about what improves the urban environment and what doesn’t — though, such is life that sometimes even the best ideas turn into misbegotten messes — and vice-versa.

Over the last year, I’ve been asking practically every person I interview for his or her suggestions. And, I have added a few I’ve collected since moving back here two years ago. Herewith, the baddies, in no particular order:

No. 1: The destruction of the Gateway District.

Located near the Mississippi, this area stretches south to the library and from Hennepin to Third Avenue S. Once upon a time, it was a park with an elaborate pavilion that welcomed those arriving at the nearby train station. During the Depression, however, it became Minneapolis’ version of the Bowery, complete with flophouses, taprooms and sleazy hotels.

By the 1950s, the city decided it had to do something. The buildings were dilapidated and supposedly impossible to renovate. So Minneapolis won a grant from the Feds and over the next six or seven years razed 200 buildings and leveled 22 blocks, leaving a third of downtown vacant. Among the casualties: the Metropolitan Building, a then 80-year-old landmark whose central atrium was adorned with incredible iron grillwork. Buildings have gone up in the area, but it has never become vital. Much of the acreage is still devoted to surface parking lots.

“It’s now a dead area between two neighborhoods,” says Sam Newberg, founder of Joe Urban, Inc., a market research company.

The takeaway: I see two lessons here. First, you don’t knock down buildings until you have something compelling to put in their place. Second, large-scale projects are blunt instruments that destroy the good along with the bad. Among the flophouses and taprooms probably existed salvageable small buildings and rooming houses that these days, with an infusion of dough, could be turned into a walkable neighborhood of interesting stores that would give us some relief from chains. When it comes to urban renewal, it’s probably always better to go small and see what happens.

Minnesota Historical Society/Eugene Debs Becker

A view of the State Capitol from I-94, circa 1974.

No. 2:The slicing of downtown St. Paul in two.

The U.S. interstate highway system is considered one of the marvels of the modern age. On its broad lanes drivers can speed without interruption from city to city, almost as though they were in a tunnel. But those same concrete byways can and have blighted cities. Take St. Paul, which has a beautifully compact and navigable downtown. How much better would it be if I94 did not cut off the Capitol and its campus from the rest of the city?

“Separating downtown from the Capitol was obviously a terrible decision,” said Mayor Chris Coleman at a meeting of the Urban Land Institute a couple of months ago. Those lousy decisions, he added, can be with us for 100 years.

The takeaway: Freeways should transport people to cities, not churn through their guts. Highway engineers: Figure out a way to go around downtown, not through.

The article below is by Esther Cho at DSNews.com. It points out that most economists surveyed would continue to make their mortgage payments even if their property was underwater. Strategic default is the practice of walking away from a property that is underwater even though the borrower has the financial ability to continue making the payments. I find it interesting that in the commercial real estate, in many cases companies will use a strategic default as a business tactic with little stigma attached. For individuals, however, the situation is much different, the stigma associated from voluntarily walking away from a debt obligation is a major detriment.

Nearly three-quarters of economists surveyed said they would continue making their mortgage payments even if they were deeply underwater, Zillow reported Thursday.

Strategic default, which is when homeowners decide to stop paying their mortgage even though they can afford it, is oftentimes motivated by negative equity.

In Zillow’s Home Price Expectation survey for June, 71 percent of economists said they would not choose strategic default, even if they owed at least 40 percent more on their mortgage compared to the home’s current value.

The survey, which was conducted by Pulsenomics, included 114 responses from economists, real estate experts, and investment and market strategists.

The industry experts were also questioned on their position concerning a government-sponsored program to forgive principal for underwater homeowners.

Coming close to the percentage of those who said they would not strategically default, 72 percent said they opposed a principal reduction program, while 28 percent were in favor of one.

This is a reposting of a blog entry that appeared recently on The Cornerstone Group blog(see link below). It presents an interesting look at how project planners, architects, and developers can make cities a better place a better place to live.

Imagine a perfect day in your city or hometown. What does it look like? Where would you go? How would you get there? What would you do? Who might you see along the way?

Place making, an evolving multi-disciplinary approach to planning, design, and management of public spaces, seeks to transform average spaces into high-quality places where people can relax, interact, collaborate, and participate.

After years of designing cities for the automobile, astute planners and developers are once again designing for people.

Cornerstone staff recently attended a Project for Public Spaces (PPS) event, where instructors gave participants insights about how great public spaces take shape.

“Value created by the public realm will drive the success of a city.”

“How do we get from inadequate to extraordinary?” The process starts with listening to the community, because neighborhood residents truly are the experts. They know what is needed and what will or won’t work.

New York City has witnessed the redesign of several public spaces for greater pedestrian visibility and accessibility, which promotes increased activity and improves levels of public safety and comfort. Setting back corners from the street edge, away from cars, can be an important aspect to the design.

Recognizing that cities and developers alike are strapped for cash, PPS advises for the “lighter, quicker, cheaper” approach. Adding simple elements to plazas such as moveable furniture encourages people to customize a space for their specific use and group size, enabling collaboration.

Programming public spaces with a variety of activities from markets to fitness and games to performance arts and craftsbrings life to a place and attracts even more people to a neighborhood. In New York City, Bryant Park was formerly home to several drug-dealing gangs and underwent a major renovation. Committed to change, business owners supported redevelopment of the plaza through a special taxing district and created a more welcoming, accessible design, with the park booked morning, noon, and night with activities for all ages and cultural backgrounds.

Candy Chang, an artist and urban planner, recently spoke at the Walker Art Center and shared her vision for community spaces as inspiring places where citizens are both contemplative and engaged. One of Chang’s most successful projects, a wall that encourages passerby’s to fill in the blank answering the question “Before I die I want to…” has expanded to cities on several continents. A “Before I die” wall launched in Minneapolis in the Whittier neighborhood just hours before Chang’s arrival and was completely filled by eager citizens on the first day.

Thomas A. Musil, D.P.A., assistant professor in the finance department recently presented his research on Regulation of Real Estate Development Through the Use of Community Benefit Agreements. Here then are five questions with Prof. Musil:

Q. What are Community Benefit Agreements?

A. CBAs establish a process for real estate developers to include community objectives as part of the development. The developer enters into a private contract, usually with a coalition of community, faith based and/or special interest groups in exchange for their support, cooperation or forbearance regarding the proposed development. The community group typically gets the developer to agree to include any of several components in the project or in the development process. This includes things like local hiring, hiring from under-represented groups, creation of minority owned businesses, and paying for support of the community coalition. In fact, in some cases the community coalition has an approval process and monitors the development activity and final management of the development.

Q. What are you hoping to accomplish with your research?

A. Very little is known about CBAs. There is scant evidence of how these agreements produce outcomes and enhance the project and/or the community. In my research, I specifically looked at 28 of the 50 projects nationally where CBAs have been used in the development process. I reviewed at each of these projects in terms of their impact on environmental justice – the fair treatment and inclusion of all people regardless of their race, color, gender, national origin or income. Of the CBAs reviewed, 28% involved hiring in the agreement, 57% required communication between developer and community, 53% contained requirements in terms of minimum wage or living wage jobs and 53% related to contracting with certain groups such as those who are local or typically harder to employ. Continue Reading